A hard place
Legislators struggle with one industry’s tax loophole
“Singling out mining or any particular industry to pay more taxes is not a comprehensive solution,” Nevada Mining Association lobbyist Tim Crowley told state lawmakers last week.
But the mining association has already been singled out in Nevada law—mining is the only industry that has it own tax loophole written into the Nevada Constitution. Crowley did not seem particularly offended by that preferential status, nor did he volunteer to surrender it.
That loophole, part of the original 1864 language in the Constitution, protects the mining industry from being taxed on the gross proceeds of mines. As it stands, the Constitution reads, “The legislature shall provide by law for a tax upon the net proceeds of all minerals, including oil, gas and other hydrocarbons, extracted in this state, at a rate not to exceed 5 percent of the net proceeds.”
This has been worth billions to the mining industry over the decades, sending huge sums out of Nevada and out of the United States. All but one of the major corporations operating in Nevada are foreign.
In the current recession, mining is thriving, as it often does in hard times, and with public services reeling, Progressive Leadership Alliance of Nevada (PLAN) and Nevadans for Fair Mining Taxes (NFMT) last year launched an initiative petition to try to change the language of the Constitution to “The legislature shall provide by law for a tax upon the gross proceeds of all minerals, including oil, gas and other hydrocarbons, extracted in this state, at a rate not less than 5 percent of the gross proceeds.”
Crowley’s group sued PLAN and tied the matter up in court until it was too late to gather the signatures on the petition.
As a result, legislators who want more taxes from the mostly Canadian firms that operate in Nevada mining have to tinker with the law to try to get more revenue. Assemblymember Peggy Pierce has sponsored Assembly Bill 428 to reduce the deductibility of some mining expenses by 60 percent. It was during a hearing on her measure that Crowley made his “singled out” comment. (Las Vegas journalist Hugh Jackson has reported that during the 8 years from 2000 to 2007, the Nevada mining industry deducted 79 percent of gold production, paying taxes only on the remaining 21 percent.)
There is still legislation before the lawmakers to change the Constitution, but given the lengthy process for constitutional amendments, that will not help with the state’s immediate needs.
Setting aside the question of how much mining should pay in taxes, the notion of a single industry getting to have a tax break all its own enshrined in constitutional law is not considered good policy.
“We have been very cautious to always say that the Constitution is a policy document and not a document that has methodology in it,” said Carol Vilardo of the Nevada Taxpayers Association, a business group.
As an example, she pointed to the addition by voters of minimum wage language to the Constitution in 2006. That ballot measure, sponsored by PLAN, keeps the Nevada minimum $1 ahead of the federal minimum, a response to stagnating wages. PLAN went to a ballot measure after legislators killed similar measures in the legislature.
“We should deal with the minimum wage in statutes,” Vilardo said. “Any unintended consequence, you can’t simply make the change in statute.”
That’s an awkward argument for PLAN. It supports both higher mining taxes and succeeded in putting the minimum wage language into the Constitution.
That’s not the only uncomfortable line of reasoning for PLAN. One of the problems faced by advocates of higher mining taxes is that those taxes would apply not just to precious minerals but to geothermal sites and lithium, aspects of renewable energy initiatives for Nevada that PLAN has also been promoting.
But that also validates the notion that tax details should not be in the Constitution. If mining taxes were a matter of statutory instead of constitutional law, legislators could deal with distinguishing between hard rock mining and renewable energy without having to amend the constitution.
At Nevada’s second constitutional convention in 1864, where the mining tax loophole was written, delegates went through some of the same debates underway today. It was supporters of higher taxes on mining—the spiritual ancestors of PLAN—as much as anyone else who wanted the matter addressed in the Constitution.
Some delegates believed a constitution was no place for detail on tax collecting. Delegate James Banks, a Humboldt County mining superintendent, said he supported gross proceeds, but, “At the same time I do see objections to absolutely prescribing in the Constitution what shall be the mode of action. … That leaves the legislature full scope to ascertain the best manner, and decide just how the proceeds of the mines shall be taxed.”
But delegate James Sturtevant, a Washoe County farmer, also a supporter of gross proceeds, said he wanted the matter “finally and definitely settled” by constitutional language. Apparently believing that taxation of gross proceeds would pass the constitutional convention and be supported by voters, he wanted that higher level of taxation locked in. “It is well known that this same question has been very warmly contested in every legislature that has been convened in this territory, and it we leave it open it will be made an issue in every future election as to whether the mines shall be taxed on their gross proceeds or on their net proceeds.”
During the same debate, two delegates—Banks and Cornelius Brosnan of Storey County brought up an issue about the hazards of using constitutions for other than broad policy guidelines. They suggested that because of the existing state of milling technology of the time, a process might be needed for distinguishing between taxation for different lines of mining company expenses—a process normally handled by legislatures in statutes.
But the mining corporations prevailed and the convention sent a constitution limiting mining taxes to net receipts to the voters, who approved it, freezing mining tax law.
Even then the mines thought the taxation was too much, and they cultivated public officials, which often meant bribery. Nevada was then known as a “rotten borough” where graft was widespread—and, indeed, may have accounted for the triumph of net proceeds in the constitutional convention in the first place.
For a decade after statehood, the mining corporations operating in Nevada (most of them headquartered elsewhere) had been given such privileged tax treatment by the legislature that at one point a resident sued the state on grounds that because favoritism was shown to the mining corporations, he was having to pay higher taxes.
In 1875, the Nevada Legislature enacted a new bullion tax, and the corporations reacted with the direct approach: They refused to pay.
County governments and public services foundered as the mining barons withheld their taxes, and a monumental legal battle went all the way to the U.S. Supreme Court, which ruled against the scofflaw corporations.
The corporations paid the back taxes but tried to influence state legislators to forgive penalties. That, too, failed, but then the corporations won enactment of a law boosting the deductibility of their expenses. Suddenly, their reported expenses shot up to historic levels, letting them recover in “expenses” much of what they lost in the court battle.